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Medical Care's Real Problem: The Tax Code

David Gratzer
Investor's Business Daily
March 24, 2011

For small businesses across the country, the anniversary of ObamaCare was marked with sticker shock.

Premiums for health insurance rose for Buddy Zaremba's print shop by 37% and at the Woodland Design Group by 43%. Both companies are in New Hampshire, but California and other states have also seen double-digit hikes.

It's the Health Reform Paradox—generations of reform efforts, yet ever-rising premiums. Democrats claim ObamaCare is needed to tame health inflation; Republicans claim that ObamaCare must be repealed to address the cost crisis. And while the GOP is more right than wrong, this much is clear: Neither party focuses on the real problem—the tax code.

If New Hampshire, one of the healthiest states, reels in premium hike after premium hike, so do we all. Across the country, premiums roughly doubled between 2000 and 2009. It's one reason that, long before Lehman Brothers collapsed, the median family income fell.

The White House, of course, has focused on health inflation. And since the president's inauguration, the administration has found no shortage of health care villains.

The president spoke of Americans being offered two pills—"a red pill and a blue pill"—that are equally good, but one is half the price. Translation: Drug companies are greedy.

The president toured the Mayo Clinic, one of the best hospitals in the world, and noted that Mayo physicians are on salary. Translation: Your fee-for-service doc is greedy.

The president used his address to a joint session of Congress to bemoan the dearth of competition in the health insurance industry. Translation: Insurance companies are running a cartel (and are greedy).

It's not surprising, then, that ObamaCare would be filled with regulations and rules, governing everything from the profitability of insurance companies to mechanisms to reshape the practice of medicine. If the problem is greed, the response is government regulations.

Such efforts have been tried and have failed in other countries, in part, because of the unintended consequences of regulations. And it's a good explanation of the Health Reform Paradox—for 60 years, we've experimented with different government controls to rein in health spending, from certification of need laws at the state level, to price controls for Medicare federally.

What then is the problem? American health care is so expensive because it's so cheap—for every dollar of health care service, we spend directly just 12 cents. Imagine if we organized other basic needs like this. You could walk into a grocery store in Manchester or Modesto and your company would pay for practically any cut of meat or box of cereal. Would you ever leave with your cart half-empty?

A major problem is employer-based health coverage. Rising out of the wage and price controls of World War II, employers began offering health benefits in pretax dollars. A good deal for employees but not for Washington. Most estimates peg the lost income and payroll taxes at about a quarter of a trillion dollars a year—more money, incidentally, than the tax subsidy for mortgages.

Much is spent, but hardly wisely. The health-tax exclusion is regressive, helping the CEO far more than the mail clerk. For someone earning $100,000 a year, the government spends nearly four times more on health insurance than for an employee who makes just $20,000.

It contributes to the strange "buyers" market for health services, where we spend, but don't necessarily get better value for money. Will the New Hampshire print-shop employees be receiving 40% better health care this year just because their premiums soared that much?

Republicans, then, are right to attack ObamaCare. And, yes, repeal is better than full implementation. But too many of the administration's critics have fallen into the trap of good sound bites backed by light policy.

What, then, is the alternative? A health care system built on individuals and families purchasing their own coverage. Policymakers should return to the ideas of Presidents Reagan and George W. Bush, both of whom championed a capping of the health tax exclusion. Or tap the ideas considered by President Clinton's aides, who weighed taxing some health benefits.

The point is, until Washington addresses the 12-cent problem—and the tax code that created it—New Hampshire and the rest of America will need to deal with health inflation. And that makes this year's anniversary a sober affair, in Buddy Zaremba's print shop and tens of thousands of other businesses across the country.

David Gratzer, a physician, is a senior fellow at the Manhattan Institute.

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